[SYDNEY] Australia’s central bank kept its key interest rate unchanged in a widely anticipated decision, while warning that third-quarter inflation may come in stronger than expected, prompting traders to pare bets on near-term policy easing.
The Reserve Bank of Australia’s board held its cash rate at 3.6 per cent on Tuesday (Sep 30) after three cuts this year, while reiterating that it remains cautious about the outlook and that future moves will be dictated by economic data.
“With signs that private demand is recovering, indications that inflation may be persistent in some areas and labour market conditions overall remaining stable, the board decided that it was appropriate to maintain the cash rate at its current level,” the rate-setting board said in a statement.
Traders pared bets on a November rate cut to less than 50 per cent, with the next cut fully priced for May versus February prior to the decision. The Australian dollar advanced to 66.07 US cents in Sydney, while yields on policy sensitive three-year government bonds edged up to 3.59 per cent.
The decision comes as some economists have pushed back their expectations for the RBA’s fourth cut to next year, having previously expected a November easing. This has been spurred by concerns over renewed price pressures at a time when the job market remains tight.
“The RBA is stopping short of jumping to conclusions,” said Prashant Newnaha, a senior Asia-Pacific rates strategist at Toronto-Dominion Bank in Singapore. “For now, though, it acknowledges the run of firmer activity data, firmer inflation outcomes, the housing market strengthening and a tight market. This all lends a hawkish leaning to the statement.”
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The RBA’s pause comes after the Federal Reserve lowered rates this month for the first time since December. Money market pricing implies a chance of about two more Fed cuts by year’s end. By comparison, the next RBA cut is fully priced in for February, raising the prospect of a sharper divergence with the US.
Ahead of the RBA’s November decision, it will have third-quarter inflation figures together with employment reports and updated staff forecasts. On Tuesday, the rate-setting board said “recent data, while partial and volatile, suggest that inflation in the September quarter may be higher than expected”.
The board pointed to a monthly price gauge released last week, which quickened for a second consecutive month in August to hit the top of the RBA’s 2-3 per cent target. Economists have warned that the back-to-back increases in the price prints point to a broader re-acceleration in inflationary pressures. The second leg of the central bank’s mandate, full employment, appears on track with the jobless rate holding steady at 4.2 per cent in August.
“In light of the slow pace of disinflation, the tight labour market and growth recovery, the RBA’s decision to pause further rate cuts is well-founded,” said Grant Feng, senior economist at Vanguard Investments Australia.
“We continue to expect the disinflation process in Australia to be slow and uneven,” he added. “Accordingly, the RBA is likely to maintain a cautious stance, with any future easing expected to proceed at a measured pace over the remainder of the year.”
Domestically, economic data has been “in-line” or “stronger” than the RBA’s expectations, governor Michele Bullock said last week during parliamentary testimony. Officials have also noted signs that the economy is in a “cyclical upturn” with private sector demand picking up. A private consumer survey by investment bank UBS Group this month pointed to the strongest reading since records began six years ago.
“The housing market is strengthening, a sign that recent interest rate decreases are having an effect,” the board said. “Credit is readily available to both households and businesses.”
On the international front, uncertainty is elevated with the outlook clouded by the Trump administration’s protectionist policies, heightened geopolitical tension and a slowdown in Chinese demand.
